One Company, Two Identities, One Strategy
I once asked the new
head of corporate strategy at one of the world’s largest telecommunications
companies whether his organization is a single business with multiple parts or
a portfolio of businesses with a common owner. He answered, “The former.” If I
were to ask his fellow traveler at, say, GE or Time Warner, the most likely
answer would be, “The latter.” But the right answer is both.
Big companies that operate simultaneously as a single entity and a
business portfolio are more agile and durable enterprises. Each mode of operation
reinforces and even multiplies the benefits of the other. Being a single entity
enables organizations to achieve scale economies, leverage technology and a
common brand, transfer best practices, share the best people, exchange valuable
information, present “one face” to the customer, coordinate sales or pricing,
and stamp out duplication. Being a portfolio enables the businesses to shape
their own individual paths in pursuit of their particular markets and the
results expected of them (thus heightening their sense of responsibility),
tightening the perceived link between their actions and results, and
intensifying their motivation to perform. Being both at the same time enables
the individual businesses to gain from being part of a bigger whole while having
enough freedom to compete in their own particular markets, thus creating an
even stronger whole.
Take Disney. Its strategy is to create
and commercialize “corporate franchises,” such as Frozen and The Avengers,
that strengthen the earnings power of each business in its broad portfolio of
resort parks, movies, gaming, retail, theater, and more. Chief executive Bob
Iger can hold the individual businesses accountable for their own results and for
strengthening the corporate franchises from which they all benefit. Moreover,
with a strategy that brings real competitive advantages to its businesses,
Disney has a more stable enterprise; those businesses have no better place to
live than in the House of Disney.
Even highly diversified companies should have strategies that equip them
to benefit from acting as one and many at the same time. For example, Berkshire
Hathaway, the ultimate conglomerate, has a strategy to create value with three
distinctive capabilities: generate “free” capital, allocate capital better than
the capital markets, and attract well-managed companies that want to be part of
the Berkshire family. Berkshire is famous for leaving its individual businesses
alone, but chief executive Warren Buffett is equally famous for managing the
entire enterprise as a self-contained cash-generating and investing whole that
neither raises outside capital nor returns it (at least for now). Berkshire’s
businesses gain from being allowed to operate with great latitude in their own
markets while also contributing to the company’s enormously effective capital
generation and deployment enterprise. They operate both as free states and as
cogs in a much bigger economic machine.
Without strategies such as Disney’s and Berkshire’s, a company will
sooner or later suffer three problems. The first is unnecessary operational
complexity. That head of strategy for the telecoms company to whom I posed the
“single entity or business portfolio” question? There was more to his answer.
“We are the former,” he told me, “but we operate as the latter.” This identity
crisis creates difficulties. His company’s various lines of business serve the
same customers and use common assets and technology, but the company is
organized around essentially autonomous business units. Inevitably, the
business units have become fiefdoms and essentially off-limits to everyone in
“corporate” except the CEO.
Imagine how this complicates his job. He can’t effectively delegate
corporate staff activities such as marketing, technology, and HR or get the
business units to coordinate so his company can take full advantage of its
scale and scope. They just want to hunker down and be left alone, because the
company has no strategy enabling them to strengthen the whole in ways that
materially benefit each of them. That unnecessarily complicates the company’s
ability to exploit its scale and reach, and to get the business units
contributing to one another’s success.
The second problem is increased scope for making strategic mistakes. For
example, large companies buy and sell businesses all the time. Should they
prioritize those that would strengthen the company as a single entity or those
that would make a strong addition to its portfolio? Again, the answer is both.
But without a strategy that accounts for both, a company inevitably defaults to
one or the other and exposes itself to serious missteps. Microsoft over-paid
for Skype in 2011 and Nokia’s mobile devices and services
business in 2014 because, although both were supposed to strengthen
Microsoft’s core business, neither could stand on its own in the company’s
portfolio. Conversely, Time Warner’s acquisition of AOL failed because even
though it was a profitable addition to its portfolio, Time Warner had no
strategy that benefited AOL or was served by AOL. Its “strategy” was simply to
get into a seemingly attractive business.
Lastly, problem number three: Big companies are more fragile when they
lack strategies that simultaneously nurture their single-entity and
business-portfolio selves. For example, GE is retrenching to a pure-play
industrial company by selling off its financial-services business — which used to
account for more than half of the company’s earnings. HP is splitting itself into two new
companies, one for its PC and printers business and another for its enterprise
computing products and services. And Alcoa is dividing itself into a
“downstream” company and an “upstream” one. All three are examples of what
happens to companies without a strategy that enables a broad business portfolio
to act as a single entity: When times get tough, the lack of strategic
integrity in their portfolio can no longer be ignored, and they are ultimately
forced to break into smaller enterprises.
To avoid these three problems — unnecessary operational complexity, high
risk of strategic errors, and corporate fragility — companies need strategies
that make each business in its portfolio part of a bigger business powered by
distinctive capabilities that are essential to winning in all its markets.
Ken Favaro
Ken Favaro is a contributing editor of strategy+businessand
the lead principal of ACT2, which provides independent advice to business
leaders, teams, and boards, on growth, strategy, innovation, and organization.
http://www.strategy-business.com/blog/One-Company-Two-Identities-One-Strategy?gko=c37ea
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